| Topic : Credit risk mitigation |
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Credit enhancement refers to improving the credit worthiness of an asset backed security (bonds or debt securities with an asset as collateral). It offers protection against future losses for the holder.
It is broadly classified into two types, internal and external.
Internal credit enhancement
- Overcollateralization: It is said to be over collateralized when the value of the collateral is greater than the value of the liability.
- Excess servicing spread: It refers to the excess of interest amount received on collateral over the payments ( net coupon, service charge etc). This amount is deposited in a reserve account.
- Reserve Fund : Refers to cash reserve fund generated from issue proceeds.
- Senior / Subordinate tranche: Pre specified percentage of losses will be met first from subordinate tranche. This offers protection to senior tranche
External credit enhancement
Examples of external credit enhancement are letter of credit, surety bonds, bond insurance, cash collateral account, corporate guarantee etc.
4 comments on "Credit enhancement of ABS"
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Commented by
Jyoti Rath, Sr. Associate, Barclays
| 08 18 2009 09:43:29 +0000
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Commented by
Jyoti Rath, Sr. Associate, Barclays
| 08 18 2009 09:43:06 +0000
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Commented by
taranath joshi, DGM Operations, EOL,
| 08 15 2009 03:41:47 +0000
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Devi Kaladeen, Audit Manager, Health Sector Development Unit
| 08 15 2009 03:22:46 +0000
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